The Debt Management Office (DMO) of the Saudi Ministry of Finance continued its proactive on-going monthly domestic sovereign Sukuk issuance in September 2019 with a three-tranche riyal-denominated offering totaling SR8.834 billion (US$2.36 billion).
This follows the DMO’s three-tranche riyal-denominated offering totaling SR2.261 billion (US$610 million) in August 2019.
This latest SR8.834 billion Sukuk in September, issued under the Saudi Arabian Government’s unlimited SR-denominated Sukuk Programme, comprised three tranches:
- SR1.400 billion (US$370 million) with a 10-Year tenor and maturing in 2028. Subscriptions for this tranche totaled SR4.648 billion (US$1.24 billion).
- SR1.185 billion (US$320 million) with a 12-Year tenor and maturing in 2031. The second tranche was oversubscribed to the tune of SR11.012 billion (US$2.94 billion).
- SR6.249 billion (US$1.67 billion) with a 30-Year tenor and maturing in 2049. The third tranche was oversubscribed to the tune of SR15.496 billion (US$4.13 billion).
This latest issuance is marked by two important features – the long tenors of 10, 12 and 30 years, and the healthy demand for such papers as revealed by the oversubscription to all three tranches.
Another factor that is driving Saudi Arabian government bond and Sukuk issuance is that the Kingdom is now expected to take longer than the projected 2023 to balance its budget, which means that the DMO, according to local bankers, will access more financing from the domestic and international markets from bond/Sukuk issuances. The Director General of the DMO Dr Fahd Al-Saif has already confirmed that the Kingdom plans to tap the international market with a Sukuk issuance of up to US$5 billion before the end of 2019.
The 30-year tenor is important. The DMO is trying to develop the pricing process for Saudi sovereign issuances through building up a yield curve for longer tenor issuances of up to 30 years. The DMO issued its first 30-Year tranche in April this year.
“This Sukuk issuance,” said the DMO in a statement, “will be valuable for long-term financing pricing in the Kingdom and that it will support infrastructure projects, as well as public and private sector debt issuances. The 30-year issuance is expected to be a reference point to price mortgage and savings products by having it as a risk-free point on which price models are based on, and will also provide new investment products for the local market creating a new investor base such as pension funds, endowments, and insurance companies. All of these issuances constitute a key pillar in supporting and developing the local capital and debt market by building a yield curve”.
This September foray into the market is the ninth consecutive monthly domestic Sukuk issued by the DMO in 2019, bringing the total domestic sovereign Sukuk issued from January to September 2019 to SR56.06 billion (US$14.95 billion).
All these achievements, according to the DMO, are also in line with the Kingdom’s Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of Saudi Arabia Vision 2030. All the Saudi Riyal Sukuk issuances are now listed on the Saudi Stock Exchange (Tadawul) for trading, with the hope this will develop into a robust secondary market especially for domestic issuances.
The Kingdom is also having to factor in the response to Saudi risk by the major ratings agencies following the attack on Saudi Aramco oil installations in September. Moody’s made no changes to the rating (staying at A1), although Fitch downgraded the Kingdom’s rating to A (from A+) with a stable outlook.
In response to the rating actions, the Saudi Ministry of Finance stressed: “We do not believe that the actions of the country and the company in response to the event significantly impact on the risk factors mentioned in the [Fitch] report. In fact, the response and resilience of the company and the markets underline the reliable nature of the supply of oil for global markets from the Kingdom. The international community has responded positively to the resilience and reliability shown by Saudi Aramco and the Kingdom in ensuring that there were no interruptions to global oil supplies. This reinforces the world-class operational excellence and crisis management skills of the company.”
Saudi Arabia’s oil supply, stressed the Ministry, is fully back online after the attacks halved output and the Kingdom has reached 11.3 million barrels per day (bpd) capacity and will reach 12 million bpd by the end of November.
“Considering the above, the Ministry of Finance is disappointed that Fitch took a swift decision to downgrade the Kingdom. Rather, the event highlights Saudi Arabia’s outstanding capacity to effectively deal with adversities, commitment to maintaining stability in the global oil markets, and the Kingdom’s status as an important international ally. As such, the downgrade of the rating comes across as somewhat speculative without direct reference to the swift, decisive and effective response to the event,” added the Ministry.
The budget deficit currently, according to the Ministry, is well within the parameters set for the 2019 Budget. “Whilst we are committing to focused increased investment in key Vision 2030 areas, we are also improving our efficiency and effectiveness of that spending. We also have one of the strongest reserves in the world and the country’s financial assets substantially exceed its liabilities,” it added.
In September also Saudi Arabia subscribed to the IMF’s Special Data Dissemination Standard (SDDS), which is considered one of the best international practices in the provision of economic and financial data to the public. Mohammed Al-Jadaan, Saudi Minister of Finance, said that the subscription of the Kingdom to SDDS is an important step to enhance financial disclosure and transparency in accordance with international standards and in enhancing investors’ confidence in the timing and accuracy of the Kingdom’s financial and economic data.
The IMF’s SDDS has four themes for data dissemination: coverage, periodicity of publication and timing, easy access to data, and the integrity and quality of published data.